The basis of economic inquiry is:

(a)    the stock market.

(b)   the value of the dollar.

(c)    individual choice.

(d)   business ethics.

(e)    pulling predictions from your rear end.

An equilibrium outcome is one in which:

(a)    the distribution of wealth is fair.

(b)   there is no opportunity cost.

(c)    there is no scarcity.

(d)   no one has an incentive to change his or her decisions or behavior.

(e)    doughnuts are considered nutritious.

An opportunity cost arises:

(a)    only when the wrong decision is made.

(b)   only when a monetary cost is incurred.

(c)    whenever any choice is made.

(d)   only when a time cost is incurred.

(e)    if there are no more opportunities available.

An economy is ________ if it has exploited all opportunities to benefit someone without making anyone else worse off.

(a)   efficient

(b)   wealthy

(c)    failing

(d)   equitable

(e)    opportunist

Which of the following decisions is most relevant to marginal analysis?

(a)    Should I go to college or work after graduating from high school?

(b)   Should I eat another doughnut?

(c)    Should I use a $20,000 windfall to buy a car or for a down payment on a house?

(d)   Should I get married?

(e)    Should I have the Japanese word for “fart” tattooed on my left buttock?

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Does the following situation describe an equilibrium situation? Explain why (“yes” or “no” alone won’t get you any credit).  "A town has two gas stations. One station charges $3.25 per gallon and the other $2.95. Customers can get gas immediately at the first station, but wait in a long line at the second."  Assume that everyone knows about the price difference.

This is an equilibrium.  The opportunity cost of time for the people buying the cheaper gas is lower than for those paying for the more expensive gas.  If those buying $3.25 gas wanted to, they could have bought the $2.95 gas and waited—but they don’t choose to do that.  They know about the price difference, but choose to pay more; for this reason they wouldn't be better off buying the cheaper gas.  Likewise those buying the $2.95 gas know they can buy gas immediately at $3.25, but have a different opportunity cost for time.  The simplest way to say this is: the busy people are best off paying more, while those with free time are best off paying less and waiting.

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Why do more people go to graduate school when the job market is poor?  Use the concept of opportunity cost to explain.

The opportunity cost of graduate school is lower when the job market is poor (as compared to when it is good)—if not in school you would either be earning less or unemployed.  If the job market were good, the opportunity cost of graduate school would be higher and thus fewer people would make that choice.

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For each of these situations, state which principle of interaction is at work:

(a)    On e-bay, anyone who wants to sell a piece of toast with a religious icon on it for $x is able to sell it to someone who is willing to pay $x.

Principle:  Markets (usually) lead to efficiency

(b)   A town imposes a law that requires bars and nightclubs near residential areas to keep their noise levels below a certain threshold.

Principle: Government role in restoring efficiency

(c)    At a college tutoring co-op, students can arrange to provide tutoring in subjects they are good in.  In return, they receive tutoring in subjects they are poor in.

Principle: There are gains from trade

(d)   A city decides to close underutilized neighborhood clinics in order to shift funds to their main hospital.

Principle: Resources should be used as efficiently as possible

(e)    On half.com, books of the same title with about the same level of wear sell for the same price.

Principle: Markets move toward equilibrium